Investment firms bet against Cathie Wood’s top ETF as tech falters

Cathie Wood’s recent setbacks have been a boon for some of her fund management peers. About two dozen investment advisers, including Balyasny Asset Management and a unit of Blackstone Group Inc., bought bearish put options during the first quarter on the Ark Innovation exchange-traded fund, its primary investment vehicle. company, according to regulatory documents.

While fund managers often buy put options on ETFs to protect their portfolios against market declines, options are typically linked to passively managed index funds such as the SPDR S&P 500 ETF Trust.

Yet tech-focused Ark Innovation has grown so big and fast — to US$28 billion in mid-February from US$1.9 billion at the end of 2019 — that some managers have seen the fund actively managed as a better alternative to protect against a crisis in stocks that have surged during the pandemic.

“The Ark Innovation fund has had a terrific run during 2020 and early 2021,” Efrem Kamen, head of New York-based Pura Vida Investments, said in an email. “However, the level of fund flows into the ETF seemed extreme.”

Representatives for Wood’s Ark Investment Management did not respond to phone and email messages seeking comment.

Ark Innovation, with stock symbol ARKK, returned 153% last year, buoyed by investments such as Tesla Inc. and Zoom Video Communications Inc. Its fortunes began to deteriorate in mid-February, when that signs of inflation prompted investors to abandon technology stocks in favor of value players who would benefit from higher prices, such as banks and mining companies.

The ETF has proven to be more volatile than some of the index funds that have traditionally acted as proxies for the tech sector, making it a more profitable way to bet against these stocks or hedge other holdings. ARKK is down 29% through Wednesday from its February 12 high, while ETF Invesco QQQ, which tracks the Nasdaq 100, fell 0.7%.

“If you were sitting on some serious gains at the start of this year and wanted to protect those gains, that was an effective strategy,” Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, told about buying ARKK puts.

Investors pay a premium to acquire put options, which in turn allow them to sell shares of a public company or ETF to another investor at a specified price in the future. While some managers and market makers hold a combination of ARKK shares as well as put and call options, the companies analyzed by Bloomberg held exclusively or primarily such put options.

Deer Park Road Management Co., a Steamboat Springs, Colo.-based company that trades in asset-backed securities and corporate debt and mortgages, bought put options during the first quarter of 2 .15 million ARKK shares, according to its 13F quarterly filing with Securities. and exchange commission. The stocks covered by the put options had a face value of nearly US$258 million at the end of March.

Put options were too low relative to the ETF’s past volatility, making them more attractive as a risk-hedging tool, Deer Park chief investment officer Scott Burg said during a briefing. telephone interview. Deer Park bought them to protect against rising interest rates, he said.

“As rates rose, tech stocks were crushed,” said Burg, whose company had roughly US$3.7 billion under management at year-end. “You could see it in the first trimester.”

Pura Vida acquired put options on 622,500 ARKK shares with a face value of nearly $75 million during the first quarter, according to its filing. The hedge fund’s portfolio had exposure to some of the same areas as the ETF, including genomics and telemedicine, according to Kamen.

“The volatility on Ark Innovation ETF was an effective way to hedge some of the factor risk in our portfolio,” Kamen said. Factors refer to the characteristics of a stock, such as being growth or value play.

Blackstone Alternative Solutions disclosed that it purchased put options on 1.3 million ARKK shares in the first quarter, while Balyasny acquired put options on 436,500 shares with a face value of $52 million as of March 31 . Other buyers of put options during the period included Taconic Capital Advisors, Ikarian Capital and Davidson Kempner Capital Management.

“Sometimes hedge funds look at Tesla and Ark and think ‘This is just too much and I can kill here,'” said Eric Balchunas, ETF analyst for Bloomberg Intelligence. “If you’ve made a few of these trades, you’ve probably done well over the past two months.”